Guest Article

(From the February 26, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

PBGC Proposed Guidance on Recent Changes to Premium Rates and Rules

The Pension Benefit Guaranty Corporation (PBGC) has issued proposed updates to its premium regulations to implement certain changes to the flat- and variable-rate premiums made by the Deficit Reduction Act (DRA) of 2005 (P.L. 109-171) and the Pension Protection Act (PPA) of 2006 (P.L. 109-280), and to add provisions for the new termination premium established by the DRA and modified by the PPA. 72 FR 7755 (February 20, 2007). The proposed regulations address only those changes that are effective beginning in 2006 or 2007. Other changes will be addressed in future guidance. The PBGC is accepting comments on the proposed regulations until April 23, 2007.

Flat-Rate Premium

Effective for plan years beginning in 2006, the DRA increased the PBGC flat-rate premium from $19 to $30 per participant for single-employer plans, and from $2.60 to $8 per participant for multiemployer plans. The DRA also provides for automatic annual inflation adjustments to the single-employer and multiemployer flat-rate premiums for plan years beginning in 2007 and later. The inflation-adjusted flat-rate premium is $31 per participant for single-employer plans, and the same $8 per participant for multiemployer plans.

The preamble to the proposed regulations states the PBGC's position that the DRA did notchange the single-employer flat-rate premium rate for plan years beginning before 2006. The PBGC offered this clarification because ERISA § 4006(a)(3)(A), as amended, can be read to suggest the $30 per participant flat-rate premium is effective for all plan years beginning after 1990.

With respect to the flat-rate premium for multiemployer plans, the proposed regulations address how to count participants. Basically, ERISA §4006(a)(3)(A) provides the flat-rate premium is "$8.00 for each individual who is a participant in such plan during the applicable plan year." According to the preamble to the proposed regulations, the "participant count is to be taken as of the premium snapshot date described in the premium rates regulation and PBGC's premium instructions (generally the last day of the plan year preceding the premium payment year.)"

Finally, the proposed regulations discuss certain issues relating to the annual inflation adjustment of flat-rate premiums. The preamble states the flat-rate premium rates can never go down due to an inflation adjustment. So if the national wage index is negative for a year, the flat-rate premiums will not change. Also, flat-rate premium adjustments always must be rounded to the nearest whole dollar. According to the preamble, "PBGC interprets this to mean that if the adjustment formula would produce an unrounded premium rate of some number of dollars plus 50 cents, the premium rate will be rounded up."

Variable-Rate Premium

Neither the DRA nor the PPA changed the variable-rate premium rate for single-employer plans; it still stands at $9 per $1,000 of unfunded vested benefits. However, the PPA did make changes designed to conform the variable-rate premium to the new minimum funding rules, and also added a variable-rate premium cap for employers with "25 or fewer employees on the first day of the plan year." The cap amount is "$5 multiplied by the square of the number of participants in the plan on the last day of the plan year preceding the premium payment year." Thus, the variable-rate premium cap for a plan with 20 participants as of the last day of the preceding plan year would be $2,000 ($5 x 20^2 = $5 x 400 = $2,000).

The preamble to the proposed regulations points out that the 25 employee test is applied on a controlled group basis. Also, according to the preamble, "Since a plan maintained by one contributing sponsor may or may not also be maintained by one or more other contributing sponsors that are not in the first sponsor's controlled group, the applicability of the cap must be determined plan by plan, not employer by employer." Also, the proposed regulations would adopt a modified version of the "employee" definition used for purposes of the IRC § 410(b) minimum coverage requirements.

Termination Premium

The DRA established a new $1,250 per participant "termination premium" for certain distress and involuntary terminations. The termination premium generally is payable for each of three years immediately following the plan termination or, in some cases, the plan sponsor emerging from bankruptcy. The PPA made the termination premium permanent (it initially applied only to plans terminated after December 31, 2005, and on or before December 31, 2010), and made certain other modifications to the termination premium rules.

A distress termination is possible only when each of a plan's contributing sponsors, and each member of any contributing sponsor's controlled group, meets one of the following three specific "distress tests":

The termination premium applies in the case of distress terminations occurring because the plan sponsor is the subject of a bankruptcy reorganization proceeding or is suffering a business hardship, but does not apply to distress terminations occurring because the plan sponsor is the subject of a bankruptcy liquidation proceeding. So what happens vis-à-vis the termination premium if one or more of the contributing sponsors or controlled group members is the subject of a bankruptcy liquidation proceeding? The preamble to the proposed regulations explains that the termination premium applies as long as at least one contributing sponsor or controlled group member is the subject of a bankruptcy reorganization proceeding or suffering a business hardship.

The proposed regulations also provide guidance on determining which contributing sponsor is responsible for paying the termination premium, the rules for counting participants for purposes of determining the termination premium amount, and the termination premium due date.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Laura Morrison 202.879-5653, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.